The Opening Belle - Tapering The Taper Talk

Don’t discuss reducing the amount of monetary-policy support for the U.S. economy while the pandemic is still raging, said two Federal Reserve officials after some of their colleagues mooted a debate later this year.

“We want to get through the pandemic and sort of see where the dust settles, then we will be able to think about where to go with balance-sheet policy,” Federal Reserve Bank of St. Louis President James Bullard said Tuesday during an online interview with the Wall Street Journal.

Noting that the outlook will hinge on the successful rollout of Covid-19 vaccines and the path of the virus, Bullard said “we are going to have to see how all of that proceeds here going forward. Then we will be in a position to make a judgment.” Bullard is not a voter this year on the rate-setting Federal Open Market Committee.

The Fed last month signaled interest rates would stay near zero at least through 2023 and pledged to keep buying bonds at a $120 billion monthly pace until “substantial further progress” had been made on its employment and inflation goals.

Boston Fed chief Eric Rosengren, speaking later Tuesday, also made clear he didn’t want to get into the debate of when to pare back that massive support.

“I expect it to be a little while before we’re even talking about tapering on our purchases of government and mortgage-backed securities,” he said in answer to a question following a speech.

Their remarks are the latest from officials on whether the Fed should discuss tapering bond purchases later in 2021, catching the attention of investors as the yield curve steepens and rates on 10-year Treasuries push to the highest levels since March.

Atlanta’s Raphael Bostic and Dallas Fed chief Robert Kaplan have both recently said they’re open to discussing it if the economic recovery from the virus is sufficiently robust.

Fed Vice Chair Richard Clarida said last week that he did not favor tapering this year. Fed Chair Jerome Powell could weigh in on the matter when he talks Thursday, in one of the final speeches by a U.S. central banker before they enter their blackout period before the Jan. 26-27 FOMC meeting.

After a wobble earlier in the week, the oil market continued its move higher yesterday, with Brent trading to its highest level since late February 2020. A sell-off in the USD proved supportive for the market, while some further near-term support is likely to come from the API numbers which were released overnight, showing that US crude oil inventories fell by 5.82MMbbls over the last week.

While the API reported a fairly large decline in crude oil stocks, refined product inventories increased, with gasoline and distillate fuel oil stocks growing by 1.88MMbbls and 4.43MMbbls respectively.

The more widely followed EIA weekly numbers will be released later today, and the market is expecting a crude oil drawdown in the region of 3MMbbls.

Saudi Arabia slashed crude oil supplies to at least nine refiners in Asia and Europe after the kingdom volunteered to cut its production by 1 million barrels a day for February and March.

Aramco will supply less crude as part of long-term contracts next month, giving some Asian processors as much as 20%-30% less than they had sought, according to company officials who received the notices but asked not to be identified as the information is private. A European refiner that typically buys small volumes from Saudi Arabia will not get any cargoes for February.

Supply cuts were focused on heavier grades such as Arab Medium and Arab Heavy, the officials said. State-owned Aramco declined to comment when contacted on the matter.

Saudi Arabia’s move to sell less oil comes amid an overall decline in crude demand across Asia due to peak refinery maintenance season from March to April. Separately, the resurgence of Covid-19 infections across Asia and Europe, and the declaration of a state of emergency in parts of Japan and Malaysia are also reducing fuel consumption and keeping refinery run rates at low levels.

Five other Asian processors sought less crude for February and received the volumes they requested, official said. Aramco hiked its official selling prices for all sales to Asia and the U.S. last week after its surprise announcement to implement deep cuts for the month.

Across Asia, refiners had been anxiously awaiting Aramco’s release of so-called allocations for February on expectations of tighter supply. The size of Saudi Arabia’s pledged curbs was larger than the market had anticipated, coming on top of Abu Dhabi’s move to cut Asian term volumes for key grades by 20% next month.Trump Says He’s at ‘Zero’ Risk of Removal Under 25th Amendment

Vice President Mike Pence said Tuesday he wouldn’t invoke the 25th Amendment to remove President Donald Trump from office, writing in a letter to House Speaker Nancy Pelosi that it’s time for the nation to heal after last week’s attack on the Capitol.

Pence’s letter comes in response to a resolution House Democrats will put to a vote Tuesday night urging him to use his constitutional authority to end Trump’s term early. Pence said he’s asking members of Congress to “avoid actions that would further divide and inflame the passions of the moment.”

The vice president said the U.S. Constitution’s 25th Amendment was designed to address presidential “incapacity or disability” and accused the House of Representatives of playing “political games.” Democrats plan to vote on the non-binding 25th Amendment resolution anyway.

President Donald Trump said he’s not at risk of being removed from office after encouraging supporters who went on to attack the U.S. Capitol last week -- but warned that Democrats’ efforts to oust him could backfire on President-elect Joe Biden.

“The 25th Amendment is of zero risk to me but will come back to haunt Joe Biden and the Biden administration,” Trump said Tuesday near Alamo, Texas, referring to a constitutional amendment that lays out a process for the president’s cabinet to remove him. He didn’t elaborate.

With the vice president having ruled out such a step, Democrats are largely united around an impeachment vote Wednesday.

Democrats have enough votes to impeach Mr. Trump even without GOP support, and leaders are plowing ahead even with just a week left in the Trump presidency. If the House reaches the majority needed to impeach Mr. Trump, the matter then goes to the Senate, where a two-thirds supermajority is required to convict.

That would require many Republicans to join Democrats to vote Mr. Trump out, but so far only a handful of GOP senators have said Mr. Trump committed impeachable offenses.

Mr. Trump on Tuesday criticized Democrats for seeking to impeach him, calling it a “continuation of the greatest witch hunt in the history of politics” and said the move was “causing tremendous anger.” He also called for “no violence,” as concerns mount about the possibility of more violent protests around Inauguration Day, Jan. 20.

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Bitcoin resumed declines Wednesday as the digital coin heads for its worst week since March last year, casting doubt on the outlook for the cryptocurrency boom.

Bitcoin fell as much as 6.8% to about $32,359 before paring some losses, according to a composite of prices compiled by Bloomberg. The largest cryptocurrency hit a record of almost $42,000 on Jan. 8 before tumbling to a low around $30,300. The Bloomberg Galaxy Crypto Index fell as much as 7.1%.

The price swings evoke memories of Bitcoin’s December 2017 bubble that was followed by a rapid collapse. They also test recent narratives, such as the argument that Bitcoin is maturing into a hedge against dollar weakness and inflation risk, and attracting longer term investors.

An alternative view is that fast money seeking rapid gains helped to propel the quadrupling in Bitcoin over the past year, leaving the rally exposed to the risk of such investors pulling out as momentum wanes.

The euro-area economy is poised to shrink again at the start of this year as the resurgent pandemic plunges the region into a double-dip recession.

Analysts at banks including JPMorgan Chase & Co. and UBS Group AG are downgrading forecasts to account for renewed lockdowns -- in some places tougher than ever -- and the prospect that the new coronavirus variant ravaging the U.K. will do the same on the continent.

Lockdowns and slow vaccinations “aren’t helping,” said Katharina Utermoehl, senior economist at Allianz SE. “The drawn-out restrictions, which started rather lightly, are the bigger problem.”

Bloomberg Economics now says the euro-area economy will shrink about 4% in the first three months of 2021, based on “pessimistic” assumptions about how long restrictions will last. It previously forecast growth of 1.3%.

JPMorgan, which reckons the economy suffered a massive 9% contraction in the fourth quarter of 2020, now projects a 1% downturn in the first quarter of this year compared with its earlier forecast for 2% growth.

UBS expects a first-quarter drop of 0.4%, compared with its earlier expectation for 2.4% growth. Goldman Sachs Group Inc. predicts a slight contraction, with major uncertainty and “risks skewed further toward the downside.”

ING expects zero growth “at best” in the next three months, and said the economy won’t return to its pre-pandemic level until well into 2023.“2021 is starting on the wrong foot,” Chief Economist Peter Vanden Houte said in a report. “The start of the vaccination campaign has been slow and sometimes chaotic.”

Most economists predict that it’ll be the second quarter -- after more than a year of misery -- that a recovery ultimately gets under way. The bounce-back could be sharp, at least initially, once restrictions are eased and infections subside, as more of the population is vaccinated.

Pent-up demand could see a chunk of the hundreds of billions of euros of consumers’ involuntary savings being unleashed -- potentially causing a temporary flareup in inflation.

By the second half of the year, the European Union’s unprecedented 1.8 trillion-euro ($2.2 trillion) recovery fund and multi-year budget should be supporting growth -- public investment that will be crucial if companies want to repair finances debilitated by the crisis.

“We expect governments to provide ongoing support to assist the recovery, with a shift from income support to demand stimulus,” UBS economist Reinhard Cluse said in his report. “Ongoing monetary policy support throughout 2021 and into 2022 seems assured.”

Morgan Stanley strategists have dropped their expectations of near-term weakening in the dollar amid a regime shift in U.S. rates propelled partly by prospects for meaningful fiscal expansion.

“It’s no longer attractive to be positioned for a weaker dollar from here given the uncertainties around the fiscal policy outlook, the monetary policy outlook, and the growth and inflation outlook,” Matthew Hornbach, global head of macro strategy, said in a phone call on Monday.

“We turn neutral on the USD amid rising U.S. fiscal stimulus odds and crowded USD sentiment,” Hornbach, colleague James Lord and others wrote in a note dated Jan. 9. Meanwhile, they said they’re looking “for signals on when to turn bullish.”

Two key factors are behind the revised call on the dollar. Democrats’ victory in the Georgia runoffs last week suggests as much as $1 trillion in additional Covid-19 relief may be coming as soon as this quarter, the strategists said. There’s also the possibility of discussions by the Federal Reserve about normalizing policy, which could begin as early as June.

“These two forces have the power to dispel a widespread USD-negative assumption of low U.S. yields,” the firm said. “With focus shifting to new fiscal policies in the U.S., we think both U.S. real yields and the U.S. dollar are in a bottoming process.”

In addition to Morgan Stanley, Wells Fargo Securities strategists wrote on Monday that “USD weakness is starting to look stretched, and we think a short-term reversal is imminent.”